Editor’s Note: This post was originally published on Seattle 2.0, and imported to GeekWire as part of our acquisition of Seattle 2.0 and its archival content. For more background, see this post.
By Gerry Langeler
Everyone wants to see the hockey stick (investors, employees, YOU) so you feel like it’s worth the trip and sweat in building a start-up. But there are a few booby traps to be aware of along the way. I’ve lived through experiences on both ends of the spectrum — as a new investor who “bought in” to an aggressive set of numbers pre-financing, only to have the team cut the current year by 50% at our first board meeting. Ugh! I was not a happy camper, and neither were the angel investors when I insisted they go back and cut the pre-money valuation of the round just closed in half. They did, but it was no fun for anyone and serious credibility was lost.
On the other side, I have a current portfolio company that is about to raise their B round, and will go from $1M to $3.5M of revenue year over year. That’s great percentage growth. but I told them, “This just doesn’t feel like enough growth to capture the imagination of the VC community!” The team pushed back and said while the second year looks light, in their business, they would be planting seeds (smaller deals) with all the right customers, setting themselves up for a $13M third year. “You have to be patient,” they said. I loved it and they are right!! We’re going out to the investor market with their numbers, not goosed by me.
A third example, and one that I think hits the “perfect temperature porridge” middle ground nicely, is a deal that where the CEO gave me two sets of projections… The sales or “stretch” projections (if they hit it, everyone would get 200% bonus) and then the base plan where bonus would get paid but at a much more normal level. They wanted me to base my investment valuation on the first plan, while I wanted to set it on the second plan. They did a fantastic job with a bottoms-up analysis defending the more aggressive plan. As a result, I still set it on the second plan, but on the aggressive end of my range. While the company has tremendous potential and I am very happy with the investment, they are tracking to the conservative (but still very attractive) plan. So my valuation, in retrospect, was on the entrepreneur side of “just right”. Both of us feel good about how we came together – and there is terrific trust both ways.